If an inexperienced trader is looking for a new forex broker, the trader can be described as a “broker's favorite mid-day snack”. Despite numerous warnings, disclaimers and crucial clauses hidden in tiny print, many people still fall prey to bad forex brokers and lose everything. They don't just walk away without the shiny new Corvette they were dreaming about. They're left without any money at all. These are the brokers with dodgy and questionable trading practices. Bad forex brokers use many lucrative-sounding words like liquidity, leverage, fixed spreads, and margin, which may confuse a newbie. Ultimately, if there is no understanding of how the foreign exchange market works, there will be a huge loss of money faster than one can imagine. To help spot the green snakes in the green grass, here are some identifying traits of a bad forex broker:
1. MARKET MAKERS:
If you cannot invest at least $1000 into opening a forex account, there is every possibility of attracting a market maker or straight-through processing account. These brokers are called market makers because they make their own markets, In other words, these firms use their assets to manipulate bids, spreads, and trades within an intra-company submarket dominated by the firm's own assets. If a brokerage declares that the trade order will be placed on the open market but the account contract says that the broker makes its money on the bid/sell price, that broker is likely to be deceitful and a bad broker. They usually do not put the order on the open market; instead, the order will be placed in an in-house market in which the brokerage can tamper with the bid/sell price to its advantage.
2. COMMISSION FREE (WHICH IS NOT FREE):
Forex brokers that do not charge commissions collect profit from contemplating on the bid/sell spread. Ninety-nine percent of the time, commission-free brokers are market maker brokers (as stated in the first point above). No one can stay in business by not charging a commission and losing on the bid/sell price, so in most cases, these firms are market makers so that they can control their profits.
3. BUCKET SHOP:
The term "bucket shop" refers to a fake brokerage firm that employs aggressive sales tactics in order to sell the securities it owns and wants to get rid of to ill-informed clients. They receive the trade order but never place it on the open forex market, instead, it is placed in a proverbial bucket, and that is, they drop the slip in a bucket and not execute them. Then, based on the real exchange numbers, and in some cases fabricated numbers, they tell you whether you made or lost money on the trade after the fact, without giving you access to real-time market data. These brokers pay out a little from time to time to appear genuine, but for the most part, they just keep the profits for themselves.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.